By Michael Georgy and Stephen Kalin
BAGHDAD (Reuters) - A financial squeeze is forcing Iraq to put major weapons deals on hold, but the country will hire 10,000 additional paramilitary forces seen as critical in the fight against Islamic State, its finance minister said on Wednesday.
Baghdad will focus its military spending in 2016 on light and medium weapons such as sniper rifles, as well as anti-mining devices and surveillance equipment as an alternative to heavier weapons like artillery.
"There has been a shift in emphasis by the government to improve the quality of the weapons that are needed for this type of war," Hoshiyar Zebari in an interview for the Reuters Middle East Investment Summit.
Although major oil exporter Iraq has less cash because of lower global oil prices, the shift to smaller, more agile weapons may actually boost counter-insurgency efforts, he said.
The Popular Mobilisation Forces (PMF), which include volunteers, Sunni tribal fighters and powerful Iranian-backed Shi'ite groups, are seen as a bulwark against Islamic State militants who seized nearly a third of the country last year.
Tens of thousands of those fighters are deployed around the country alongside the Iraqi military, which nearly collapsed twice in the past year in the face of Islamic State advances.
Zebari said about 20 percent of Iraq's 2016 budget would go to the country's defenses, including the PMF. But spending on the paramilitary forces would be less than the $1 billion allocated for this year, in line with broader budget cuts.
"I think we gave them ... about 10,000 new recruits which they have requested, but they have their budget within the security forces," he said of next year's national budget. "We will pay their salaries, we pay for their equipment, we pay for their basic war needs."
Iraq's national budget proposal for 2016 envisages expenditure of about $95 billion with a nearly $21 billion deficit; that compares with original projections for this year of roughly $105 billion of spending and a $22 billion deficit. Oil accounts for over 80 percent of Iraq's fiscal revenues, but crude prices have more than halved since mid-2014.
Concerned about Iraq's finances, international investors demanded such a high yield when Iraq tried to sell $2 billion of bonds a few weeks ago that Baghdad eventually canceled the sale.
But Zebari said the government was making strenuous efforts to repair its finances; he expects Baghdad to spend only about 60 percent of its 2015 budget by the end of this year because of cuts in operational and investment spending.
"We've really imposed very stringent controls over all the ministries and the government departments in order to overcome this crisis."
Zebari said Iraq's revenues from crude oil sales in 2015 were still below government projections, which saw monthly exports at 3.3 million barrels per day and oil at $54 a barrel. He said the average price of oil for the year until October had been $48.
Critical to shoring up Baghdad's revenues is a deal with the Kurdistan Regional Government on oil exports from that northern region. The KRG agreed to transfer up to 550,000 barrels per day to Iraq's state oil firm SOMO in exchange for Baghdad granting Erbil 17 percent of the country's budget payments.
But the KRG cut allocations to SOMO in June and has steadily increased independent crude oil sales via a pipeline to Turkey, effectively undoing the deal.
Zebari said he was confident that a delegation from the semi-autonomous region would come to Baghdad soon to negotiate reactivating the agreement, which is included in the 2016 national budget proposal.
"If we can get the KRG-Baghdad oil (agreement) reinstated again and both sides to implement it in good faith, I think we can succeed this year," he said.
(Editing by Andrew Torchia/Jeremy Gaunt)